RBS chief executive Hester says bank is a 'prisoner of the market' over large bonuses

Royal Bank of Scotland has to pay large bonuses because it is a “prisoner of
the market” despite being 84pc-owned by the taxpayer, chief executive
Stephen Hester has said.

Stephen Hester, charged with turning around the Royal Bank of Scotland, has said that the bank is a 'prisoner of the market' on bonuses

By Philip Aldrick, Banking Editor

12:09PM GMT 12 Jan 2010

Admitting before the Treasury Select Committee that “the banking industry has invited on itself scrutiny” over bonuses, he described his policy at RBS as paying “the minimum we can get away with in the market place”. “Shareholders have raised concerns about our ability to keep and motivate good people,” he said, conceding that staffing is “my single greatest problem”.

However, he refused to be drawn on whether he believes the market is broken, arguing instead that banks need to be weaned off taxpayer support and able to fail without requiring public rescues. “If we get to the point where we’re confident banks will not have to call on the public purse, then pay becomes a private sector issue again.”

The subject of bonuses dominated Mr Hester’s one-and-a-half hour grilling before the cross-party group of MPs. He would not comment on the total bonus pool the bank will pay, which has been estimated at £1.5bn and will be decided next month.

However, he did indicate that bankers would not be rewarded for profits made off easy Government money. “If there are items of windfall profit that people deserve to be paid nothing for, we would take that into account,” he said.

Investment banks have been accused of making vast profits off the low interest rate environment introduced to stem the financial crisis. George Soros, the legendary hedge fund manager, has described the profits as “hidden gifts” provided by the taxpayer.

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Mr Hester took issue with the analysis, saying: “I believe this to be a massively exaggerated topic. We have not derived a substantial amount of profit from the so-called ‘carry trade’.”

He conceded that a “handful” of bankers would be paid cash bonuses “due to previous legal commitments” but all bonuses for those on more than £39,000 would be in shares – as required by the Government. Overall levels would be set depending on performance and market rates. “We are a part-prisoner of the market,” he said.

Mr Hester added that the bank is on target and, he believes, would not need any new capital beyond what has already been raised. “I believe we have taken all the capital adequacy measure we need to take to deliver our plan,” he said. “We will have one more year of losses and then I hope we will return to profitabilty.”

He said he “would be hopeful that there would be a number of opportunities for share sales in the next three to fopur years”. However, he pointed out the largest immediate risk RBS is facing is political – an apparent comment on whether politicians make any decisions with regard to RBS for election purposes.

“We do have risks over the next few months in election season, which may be a distraction to staff,” he said.